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Recognizing a Moral Hazard in the Underwriting of Insurance   

https://zalma.com/blog

The moral hazard is the increase in uncertainty caused by personal acts  of individuals. These acts may contribute to the probability or severity  of loss. The individual creating the problem may be the policyholder or  another person. In either case the chance of loss is increased. A moral  hazard may be present in every line of insurance. No underwriter can  ignore it without incurring an increased risk of substantial loss. The  moral hazard is very difficult to detect and therefore very dangerous to  the insurer.  "Moral hazard\\u201d is the term used to denote the incentive that insurance  can give an insured to increase the risky behavior covered by the  insurance. [May Dept. Stores, 305 F.3d 597, Erickson-Hall Constr. Co. v.  Scottsdale Ins. Co. (S.D. Cal., 2019)]  The competent underwriter, and adjuster, recognize that moral hazard  describes a policyholder who deliberately causes loss by, for example:  setting fire to his or her building or automobile; conspiring with thieves to steal his or her cargo-laden truck; making false entries in his or her accounts in order to justify a claim  for nonexistent property; or reporting a burglary that never took place at his or her home or  business.  Some underwriters think only of the intentional fraud when they use the  term \\u201cmoral hazard.\\u201d If an applicant reveals such a fraudulent intent,  no sane underwriter would agree to insure him. It is for the adjuster to  discover it and warn the underwriter against maintaining the risk in  the future. However, most moral hazards are not of this deliberate type.  There are many cases when the attitude of the policyholder has  increased the hazard, without any thought of a deliberate act. The moral  hazards described below can be controlled by an effective and  knowledgeable underwriter.   \\xa9 2021 \\u2013 Barry Zalma  Barry Zalma, Esq., CFE, now limits his practice to service as an  insurance consultant specializing in insurance coverage, insurance  claims handling, insurance bad faith and insurance fraud almost equally  for insurers and policyholders. He also serves as an arbitrator or  mediator for insurance related disputes. He practiced law in California  for more than 44 years as an insurance coverage and claims handling  lawyer and more than 52 years in the insurance business. He is available  at http://www.zalma.com and zalma@zalma.com.  Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE  Legend Award.  Over the last 53 years Barry Zalma has dedicated his life to insurance,  insurance claims and the need to defeat insurance fraud. He has created  the following library of books and other materials to make it possible  for insurers and their claims staff to become insurance claims  professionals.  Go to the podcast Zalma On Insurance at https://anchor.fm/barry-zalma;  Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at Rumble.com at https://rumble.com/c/c-262921; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library \\u2013 https://zalma.com/blog/insurance-claims-library/ Read posts from Barry Zalma at https://parler.com/profile/Zalma/posts; and the last two issues of ZIFL at https://zalma.com/zalmas-insurance-fraud-letter-2/  podcast now available at https://podcasts.apple.com/us/podcast/zalma-on-insurance/id1509583809?uo=4